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June 26, 2013

Your Clients and Their Children: Solutions to Joint Bank Accounts

If you didn’t get a chance to read my first article on this subject, Your Clients and Their Children: The Problems with Joint Bank Accounts, it may be helpful to review it as a means of providing context for this article. As noted in that first posting, if a client couple wishes to make their bank accounts into joint accounts with their children, there are various resolutions for handling that wish efficiently and in less risky ways. Hopefully, some of these points will help you with possible client questions on this simple, yet very important subject.

Solution 1: Transfer on Death

If your client’s goal is to bypass the probate process, this option will still allow them to keep the ownership risks of assets in check. An easy way to handle this situation is by adding a “pass of title documentation” to their bank account. Many banks call these documented options a “transfer on death” or “payable upon death” provision.

Both of these provisions are nothing more than adding a beneficiary designation to their bank account, allowing the account to pass to the designated child or children at the parent’s death. While this option protects the parent’s assets from risk of loss due to a child’s negligence or bad decisions, it should still be highly questioned within the context of the parent’s estate planning objects, as the risk of bypassing their will may not be in line with the parent’s big-picture desires. Keep in mind also that this option doesn’t allow the child to write checks and/or pay bills from the bank account, which may be your clients’ main goal in this process.

Solution 2: A Convenience Account

Many banks offer this optional alternative to putting a child’s name on their parents’ bank account. However, most banks don’t promote them, so don’t expect a bank teller to know what you’re talking about if asked. This option authorizes the child/children to write checks/make deposits to the account, but doesn’t grant them any ownership rights to the money in the account.

At the same time, this option will not allow the assets to bypass the probate process, which can be good, as it will diminish possible family misunderstandings and/or estate planning issues mentioned in my previous article. Also, when the child doesn’t have ownership rights in the actual account, this helps prevent any creditor making claims against the child from ever accessing the parent’s bank account. So if you mention this option to your clients, tell them they need to ask for a “multiple-party account without the right of survivorship,” also known as a convenience account.

Solution 3: Durable Powers of Attorney

The most prudent legal alternative to putting a child’s name on a bank account is obtaining durable powers of attorney for the child. While this option gives children the legal right to act as if they were their parent, it can be very dangerous if improperly used. However, there are many benefits to having this document, which no other option can comprehensively provide.

Children would be able to handle all affairs of their parent’s financial needs from paying bills to withdrawing money and even selling assets, in some cases. Yet this document is only good if the parent is alive, because once the parent dies, this document is no longer valid and the Will becomes legally binding and takes precedent. This is the gold standard in planning and I highly recommend it, as it allows for the most flexibility.

Hopefully, I’ve provided clarification to the normal bank account questions dealing with aging clients. I find that clients see the simplicity of driving to the local bank branch and adding their child’s name to their checking account as an unthreatening, easy-to-accomplish move. However, the possible risks associated with that small act open the door for advisors to do their job and educate clients on better alternatives for accomplishing the same goal.